PHILIP MORRIS CUTS CIGARETTE PRICES, STUNNING MARKET

By ALLEN R. MYERSON

Published: April 3, 1993

The Philip Morris Companies yesterday cut the price of its Marlboro cigarettes, the world's best-selling brand, in an acknowledgment that its flagship product was threatened by competition from discount brands and the changing habits of smokers.

The reduction of some 40 cents a pack will lower the price to a national retail average of $1.80, including excise taxes. The move startled investors, who knocked $14.75 off the price of Philip Morris shares, to $49.375.

The collapse of other tobacco stocks and a bond market rout contributed to a broader selloff in the stock market, and the Dow Jones industrial average fell 68.63 points. [ Page 43. ]

Lesser price cuts will extend to other Philip Morris brands. In explaining the reductions, company executives cited gains by discount and generic labels costing as little as 89 cents a pack and an economy that remains weaker than they had expected. Change in Buying Patterns

The executives also conceded that many consumers had changed their buying patterns, balking at huge premiums for prominent brands and dropping their allegiance once they sniffed better value elsewhere. Marlboro's national market share has fallen to 22.2 percent, from 24.3 percent last year.

The tobacco industry is also under siege from the Clinton Administration, which is considering an increase of as much as $2 a pack in the 24-cent Federal tobacco tax to discourage smoking and pay for changes in the health care system. And some states plan sharp increases in their cigarette taxes; Gov. Mario M. Cuomo of New York has proposed a 21-cent increase, to 60 cents.

Analysts predicted much greater competition in the tobacco industry, which has long been able to raise prices far above the rate of inflation. They said sharp price cuts were all but certain.

"It is a price war," said Leigh Ferst of Prudential Securities. "Some people think it's just a battle, but it's really a war."

The Marlboro cigarette is the world's best-selling consumer product. Annual sales of six billion packs in the United States nearly match the sales of the next five brands combined. Philip Morris said its operating profits from United States tobacco sales would fall this year by as much as 40 percent, or $2 billion, as a result of the price cuts and greater competition.

Smaller savings, on average, will extend to other Philip Morris brands, including Merit, Parliament, Benson & Hedges and Virginia Slims. The savings will show up during the next few weeks through a variety of special offers as well as some direct price reductions.

Company officials spoke carefully of their moves as special promotions rather than permanent reductions, but specified no time limits. They said they would issue discount coupons, send special offers through the mail and cut wholesale prices in some instances, giving smokers an average savings of about 40 cents a pack. These actions will allow the company to formally maintain its current wholesale prices.

Executives at Philip Morris's main competitor, the R. J. Reynolds Tobacco Company, which makes Camel, Winston, Salem and other brands, said they had not worked out details of their response but would defend their brands.

James W. Johnston, the chairman and chief executive of Reynolds, a unit of RJR Nabisco Inc., promised shareholders at the annual meeting yesterday that the company would take "appropriate steps to maintain its competitive positions in every segment of the market." Assailed by Health Advocates

Health groups attacked the Marlboro price cuts as an effort to lure more young smokers before new taxes take effect.

"Virtually all new users of Marlboro start as teen-agers or younger," said Matthew Myers, speaking for an antismoking coalition of the American Cancer, Heart and Lung associations. "It's that market that they're trying to expand and addict before the Federal Government increases the tax."

Philip Morris executives, who have denied aiming their products at young smokers, said they were responding entirely to business rivalry in a slack economy.

"Our strategy today is designed to deal with a competitive marketplace," said William I. Campbell, chief executive of Philip Morris USA. "It has no relation to the Federal excise tax."

In a recent test of the 40-cent price cut in Portland, Ore., the company gained four percentage points in market share, he said. With a lower price, he said, the brand can still gain customers at a substantial premium over discount labels, which have an average price of about $1.20.

Philip Morris, Reynolds and most other makers of high-priced cigarettes also sell discount brands, either under retailers' labels or as generic brands. From 1 percent of sales in 1982, these products have grown to about 36 percent, slowing the nation's overall decline in smoking.

Tobacco companies maintain that their premium cigarettes have premium ingredients: a higher proportion of American tobacco, Mr. Campbell said. But most of the higher price of premium brands represents marketing costs as well as substantial profits, which analysts estimate at about 56 cents a pack for Marlboros, before taxes, overhead and interest. The 40-cent price cut will probably not reduce the company's profit margin to 16 cents, they say, because sales volume is expected to increase.

Philip Morris, based in New York City, last year sold about $59 billion worth of Cheez Whiz, Miller beer, Maxwell House coffee, Kraft foods and dozens of other immediately recognized products -- a volume far greater than any competing maker of consumer goods.

The company calls Marlboro "the world's most valuable trademark," a boast that only the Coca-Cola Company might dispute. The brand is still personified by the rough-hewn cowboys featured in billions of dollars' worth of advertising. In much of the world, the red and white packs are virtually legal tender.